3d 5
28 UCC Rep.Serv.2d 987
ORDER
1
This is an appeal from a judgment of the United States District Court for the
Southern District of New York, Michael B. Mukasey, District Judge,
dismissing for lack of standing the claim of an undisclosed principal seeking
damages for breach of contract and fraud against the issuer of a letter of credit
who paid on the letter. On consideration of the briefs, appendix, record and the
oral argument in this appeal, it is hereby ORDERED that the Clerk of this court
transmit to the Clerk of the New York Court of Appeals a certificate in the form
attached, together with a complete copy of the briefs, appendix and record filed
by the parties with this court. This panel retains jurisdiction so that, after we
receive a response from the New York Court of Appeals, we may dispose of the
appeal.
Certificate to the New York Court of Appeals pursuant to New York Court of
Appeals Rule 500.17.
Jade-USA, Inc. ("Jade-USA"). Kools intended that the letter of credit be used to
pay for Kools' purchase of Levi's Jeans from Jade-USA. Oei never revealed to
Citibank in the application that he was acting as the agent of Kools or that he
was not the principal.
4
On October 30, 1992, Citibank opened the letter of credit, and it was
subsequently amended on November 2 and 4, 1992. Under the terms of the
letter of credit agreement, to obtain payment Jade-USA was required to present
Citibank with a sight draft bearing the identifying reference specified on the
letter of credit; an insurance policy or a certificate of insurance; an original and
four copies of Jade-USA's invoice, describing the goods being sold to Kools as
"Levi Jeans 501-0191, New, Originals, Made in USA labels"; all of the
originals of an "on board" marine bill of lading, issued to the order of Kools and
marked "Freight paid"; a packing list; and a "Certificate of Inspection" from
Lloyds of London.
In his complaint, Kools stated two causes of action: fraud and breach of
contract. Citibank brought a motion, pursuant to Fed.R.Civ.P. 12(b)(6) & (e), to
dismiss for lack of standing and for lack of particularity in pleading fraud
and/or to require a more definite statement. By an Opinion and Order dated
January 4, 1995, the district court dismissed Kools' complaint. See Kools v.
Citibank, N.A., 872 F.Supp. 67 (S.D.N.Y.1995). The district court found that
Kools, as Oei's undisclosed principal, lacked standing to sue Citibank for the
breach of a letter of credit agreement and for fraud. Judgment was entered in
favor of Citibank, and this appeal followed.
On appeal, Kools claims that the district court's decision was contrary to New
York law. Although the New York Court of Appeals has never addressed the
standing to sue of an undisclosed principal in a letter of credit transaction,
Kools argues that the district court was bound, pursuant to West v. American
Telephone & Telegraph Co., 311 U.S. 223, 61 S.Ct. 179, 85 L.Ed. 139 (1940),
to follow the decision of the Appellate Division, First Department, in Taub v.
Colonial Coated Textile Corp., 54 A.D.2d 660, 387 N.Y.S.2d 869 (1st Dep't
1976). Taub involved a dispute between an Israeli coat manufacturer and a bank
("Mercantile") which had issued a letter of credit at the request of A. Irani Ltd.
On the face of the memorandum decision, the court in Taub seemed only to
address whether the lower court had the power to review new evidence in a
motion for reargument. As the district court noted, the Taub court's decision did
not mention either N.Y.U.C.C. art. 5, which governs letter of credit transactions
in New York, or the Uniform Customs and Practices for Documentary Credits
("UCP"), which are typically incorporated into letter of credit agreements, as
permitted by N.Y.U.C.C. Sec. 5-102(4). The First Department also failed to
discuss any policy reasons why undisclosed principals should have standing to
bring actions for breach of letter of credit agreements in the face of precedents
from this circuit and other courts which may suggest that standing in such an
agreement is limited to the named parties. See, e.g., Kunglig Jarnvagsstyrelsen
v. National City Bank, 20 F.2d 307 (2d Cir.), cert. denied, 275 U.S. 497, 48
S.Ct. 121, 72 L.Ed. 392 (1927). Furthermore, the appellant's brief before the
First Department in Taub did not raise any of these issues. See Kools, 872
F.Supp. at 71.
Because the district court was of the view that the First Department had not
been asked whether the standing of undisclosed principals in letter of credit
agreements should be different than in other contractual agreements, the district
court declined to follow Taub. Instead, the district court, after considering this
court's decision in Kunglig, as well as the decisions of other courts concerning
letter of credit transactions, concluded that a bank issuing a letter of credit is
liable only to parties with whom it has direct contact. The district court noted
that the commercial worth of letters of credit is grounded in the fact that the
issuer is insulated from the underlying transaction and that the issuer need only
be concerned with the credit worthiness of the applicant. Therefore, allowing an
undisclosed principal standing "would disrupt established expectations and
complicate letter of credit law in other ways." Kools, 872 F.Supp. at 72.
10
Kools asserts that the district court's reasoning is flawed. He argues first that
this court's decision in Kunglig supports, not undermines, his position because,
he claims, this court implicitly recognized "that an undisclosed principal of the
ostensible customer of an issuing bank may sue that bank." Appellant Brief at
21. Kools also points to cases in other courts that he claims support his
position, and that the policy considerations set forth by the district court would
not be adversely affected by granting him standing.
11
Other than Taub, we have been unable to find any case decided by the New
York state courts which would resolve the issue of the standing of an
undisclosed principal to bring a breach of a letter of credit agreement. Because
the decision in Taub, on its face, suggests that the issue there was the power of
the state Supreme Court to consider new evidence in a motion for reargument,
we do not think that the courts of New York State have settled the question of
whether the law of standing for undisclosed principals in letter of credit
transactions should differ from other transactions. We also note that the
standing of undisclosed principals to bring such actions may well affect the
commercial practices of New York lending institutions with respect to letter of
credit transactions. Accordingly, we certify the following questions to the New
York Court of Appeals:
12
13
14
We believe that these questions are suitable for resolution by the New York
Court of Appeals because the standing of undisclosed principals to bring suit
under a letter of credit agreement is an issue of importance to the State, to
banks, and to the banks' customers. New York has a significant interest in the
interpretation of letter of credit agreements because New York is a major
financial and commercial center and the standing of undisclosed principals may
affect the availability of letters of credit and the willingness of commercial
parties to enter into such transactions in New York. By removing any ambiguity
from New York law on this issue, the Court of Appeals can make it easier for
parties to enter into letter of credit agreements with full knowledge of the legal
consequences and to minimize the risks to all parties concerned.
15
The foregoing is hereby certified to the Court of Appeals of the State of New
15
16
The foregoing is hereby certified to the Court of Appeals of the State of New
York as ordered by the United States Court of Appeals for the Second Circuit.
FOR THE COURT
GEORGE LANGE III, Clerk
By: LUCILLE CARR
Lucille Carr
Operations Manager